TAX2601 EXAM PACK 2023

Oct/Nov 2021 TAX2601 Principles of Taxation 100 Marks Duration 2 Hours (plus 60 minutes for upload) This paper consists of nine (9) pages plus the annexure (p i). IMPORTANT INSTRUCTIONS: 1. All amounts exclude VAT unless stated otherwise. 2. All persons mentioned are residents of the Republic of South Africa unless stated otherwise. 3. SARS = South African Revenue Service The answering of this paper: 1. This paper consists of four (4) questions. 2. Answer all the questions. 3. Start each question on a new (separate) page. 4. Write your student number on the top of each page. 5. Show all workings, where applicable. Where an amount is subject to a limitation, clearly indicate the application of the limitation. Where any item is exempt from tax or not allowable as a deduction, this must be indicated, and a brief reason provided. All amounts must be rounded to the nearest Rand. 6. Proposed timetable (try as far as possible not to deviate from this timetable): Question Topic Marks Minutes 1 Income tax liability of a company 25 30 2 Income tax liability of a small business corporation 25 30 3 Capital gains tax 25 30 4 Provisional tax payments and gross income definition 25 30 - Additional time for upload of your answer file in pdf - 60 TOTAL 100 180 2 TAX2601 Oct / Nov 2021 [TURN OVER] Honesty Declaration: By submitting my exam solution, I declare that: • I know what plagiarism is, that plagiarism is wrong and that disciplinary steps can be taken against me if I am found guilty of plagiarism; • This exam solution, submitted by myself, is my own work; • I have not assisted any other student in any manner, and I have not had the assistance of any other person, in completing this exam; • I know that if I am found to be in violation of this declaration, I will receive 0% for this examination. Please note: You do not have to sign the declaration. By clicking the honour pledge when submitting your answer file, you automatically declare that you adhere to all the above with regards to this specific examination. Submission instructions: The exam paper will remain available throughout the examination session. Commence the submission (uploading) of your answers as soon as you have completed the assessment, do not wait for the session to conclude. You MUST start uploading your answer file at 13:00 (2 hours after the start of the exam session) at the latest, to allow enough time for any delays in the process. Cut-off time for submission is 14:00. You have to submit your answers in ONE PDF FILE – ensure ALL your pages are in one file. The file name of your pdf document must be in the following format: Student number, space, TAX2601. For example: TAX2601. Go back to the link where you downloaded your examination paper myExams. Follow the instructions on the screen. S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 3 TAX2601 Oct / Nov 2021 [TURN OVER] QUESTION 1 (25 marks, 30 minutes) GoSolar (Pty) Ltd (GoSolar) is a South African company that manufactures solar panels for commercial and residential use, in an industrial area of Johannesburg. The company’s year of assessment ends on 31 March 2021. It is not a small business corporation as defined in the Income Tax Act. Since the company’s accountant is unfamiliar with tax matters, they have requested your assistance to calculate the tax liability of the company. The company has provided you with a list of items relating to the current year of assessment, which must be used to do your calculation for taxation purposes. Each item and the information per the notes must be addressed: Income Note R Sales Lease premium & rental 2 ? Expenses Capital allowances on assets 3 ? Dividend 4 350 000 Doubtful debts & prior year allowance 5 332 000 Penalties and interest (late payment of skills development levy) 23 777 Provisional tax payment Salaries Rented office equipment 8 800 000 Notes: 1. Sales Included in sales, is an amount of R2 000 000 received on 31 March 2021 from a new customer of GoSolar for residential solar panels purchased on the same date. GoSolar was only able to deliver these solar panels on 2 April 2021. 2. Lease premium & rental On 1 June 2020, GoSolar purchased a piece of vacant land for R350 000 in Johannesburg and constructed a two-floor office block on the land. The construction cost R1 400 000 and soon after its completion the company entered into a lease agreement with a tenant for the rental of the entire office block. The agreement was signed on 1 February 2021 between the parties. The agreement stipulates a lease premium of R110 000 must be paid once-off, once the agreement is signed. Monthly rental of R20 000 was paid at the beginning of February 2021 and March 2021 to GoSolar. The tenant paid the lease premium on 1 April 2021. 3. Capital allowances on assets Below are the details of the assets: Asset Cost R Relevant information 1. Factory building 4 000 000 A newly built building that was purchased from a developer and brought into use on 1 November 2019. The factory building is in an Urban Development Zone. 2. New two-floor office block (refer to note 2 above): - Land - Construction 350 000 1 400 000 Land purchased and building erected by GoSolar. Construction completed on 16 January 2021, brought into use on 1 February 2021. (Not in an Urban development zone) S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 4 TAX2601 Oct / Nov 2021 [TURN OVER] QUESTION 1 (continued) Asset Cost R Relevant information 3. Manufacturing machine: AAA 1 700 000 Purchased new and brought into use on 1 July 2020 4. Manufacturing machine: BBB 900 000 Purchased second hand and brought into use on 30 April 2019 and then sold on 1 August 2020 for R200 000. 5. Delivery vehicle 1 380 000 Purchased new and brought into use on 1 May 2010. 6. Heavy duty truck 1 800 000 Purchased 6 May 2020 and brought into use on 1 July 2020. Note: Where applicable, Binding General Ruling (BGR) no.7 makes provision for the following write-off periods: Delivery vehicle: 4 years Heavy duty truck: 5 years 4. Dividend declared A dividend of R350 000 was declared on 28 March 2021 and paid out on 10 April 2021 to the GoSolar shareholders. 5. Doubtful debts The total list of doubtful debts (all older than 60 days but less than 120 days) amounted to R278 000 at the end of 31 March 2021. A doubtful debt allowance of R54 000 was claimed for tax purposes in the 2020 company tax return. The company does not apply IFRS9. 6. Provisional tax payment GoSolar made a first provisional tax payment of R2 679 000 for the 31 March 2021 year of assessment on 20 September 2020. 7. Salaries The salaries expense is R6 300 000 for the year of assessment. Contributions of R700 000 was paid by GoSolar to a pension fund for its employees. (This amount is excluded from the salaries expense.) 8. Rented office equipment All the office equipment was rented from a service provider. The total cost amounted to R800 000 for the year. REQUIRED: MARKS 1. Calculate the income tax liability of GoSolar (Pty) Ltd for the year of assessment ending 31 March 2021. Note: Address each item and amount and provide a brief reason if you consider any amount not taxable/not deductible for tax purposes (hint: “not deductible” is not a reason). You may ignore any capital gains tax (CGT) effect and assume that the company has elected the Section 11(o) scrapping allowance, where applicable. 2. Calculate the amount that the shareholders of GoSolar will receive (combined) in respect of the dividend declared? 24 1 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 5 TAX2601 Oct / Nov 2021 [TURN OVER] QUESTION 2 (25 marks, 30 minutes) Shisanyama Catering Equipment Supplies (Pty) Ltd (Shisa) is a company that manufactures and supplies a full range of catering equipment. The company has been trading for 23 months since 2 May 2019 and its current year of assessment ends on 31 March 2021. The company had sales over R10 million in their first and second year of trade. Shisa is a small business corporation as defined in the Income Tax Act. Shisa’s financial accountant has given you a correctly calculated taxable income amount of R7 890 000 before taking the below transactions into account: 1. Bad debts Bad debts of R28 000 was written off in the accounting records. R8 000 of this amount relates to a loan made to an employee who has died recently, and the rest of the amount relates to debtors that are considered irrecoverable. 2. Capital allowances on assets and related costs Asset Date purchased & brought into use Cost for Shisa Notes Factory 2 May 2019 R1 200 000 The factory is an old/used building which was originally erected in 1988. The previous owner claimed a 2% allowance on the building. Machine Metal – new 2 May 2020 R870 000 Machine Plastic – second hand 15 June 2020 R560 000 Sold on 1 November 2020 for R400 000. Computer system - new 2 November 2019 R600 000 Installation costs of R12 500 were incurred to install the new computer system. Office equipment - all new 2 May 2020 R940 000 Repairs to factory building - The outside of the building was repainted, as it was last painted 10 years ago and looked run down; and - An awning (outside covering) was fitted (added) at the entrance of the building for protection from the sun. R42 000 R15 000 Costs incurred on 1 November 2020. Costs incurred on 1 December 2020. 3. Donation Shisa made a R50 000 donation to “Siyabonga Africa” Fund (a public benefit organisation) and received a section 18A receipt on 14 February 2021. 4. Insurance A prepaid insurance amount of R500 000 was paid on 1 September 2020 for a 12-month period from 1 September 2020 to 31 August 2021. S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 6 TAX2601 Oct / Nov 2021 [TURN OVER] QUESTION 2 (continued) 5. Inventory The below inventory adjustments must all still be considered: • Opening stock as at 1 April 2020 was correctly valued for tax purposes at R643 000 • Purchases of inventory materials during the year was R542 000 (this amount includes import duties of R68 000 relating to materials imported from India) • Catering equipment with a market value of R13 000 was sold to a retirement home (not a registered public benefit organisation) for R2 000 • Closing stock as per the auditor’s stock count indicates a cost of R378 000 and a market value of R430 000 Other information: Where applicable, BGR no.7 makes provision for the following write-off periods: Computers: 5 years Office equipment: 5 years Furniture & fittings: 6 years Shisa has elected to apply the section 11(o) scrapping allowance, where applicable, and not to write off their non-manufacturing assets in terms of the BGR. REQUIRED: MARKS 1. Calculate the income tax liability of Shisanyama Catering Equipment Supplies (Pty) Ltd for the year of assessment ending 31 March 2021. You must provide a reason if you consider any amount not deductible for tax purposes (hint: “not deductible” is not a reason). Round off all amounts to the nearest Rand and ignore any CGT effect. 2. State and explain whether Shisanyama Catering Equipment Supplies (Pty) Ltd could have qualified to be taxed on the turnover tax basis. 22 3 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 7 TAX2601 Oct / Nov 2021 [TURN OVER] QUESTION 3 (25 marks, 30 minutes) Reboni (Pty) Ltd (Reboni) is a company that manufactures hospital and office furniture, with two factories operating in the Eastern Cape and Mpumalanga provinces. The company’s year of assessment ends on 28 February 2021 and it is not a small business corporation as defined in the Income Tax Act. On 3 April 2020, Reboni sold its factory in the Eastern Cape. Relevant details of this asset are below: Factory building Purchase date 2 May 2012 Purchase price R3 700 000 Capital allowances claimed until date of sale R1 665 000 Selling price R4 300 000 Improvements to factory building Improvements brought into use date 1 October 2019 Cost R450 000 Capital allowances claimed until date of sale R45 000 Other costs related to the factory Valuation fee obtained for purposes of the sale on 15 March 2020 R12 000 Repairs and maintenance costs over the years (all claimed as deductions for income tax purposes) R380 000 Legal fees paid on 3 April 2020 relating to the sale (not claimed as a deduction for income tax purposes) R26 000 On 20 October 2020, machine HOS1 was destroyed in a fire. Relevant details of this asset are below: Machine HOS1 Purchase date 1 June 2020 Purchase price R700 000 Capital allowances claimed until date destroyed R140 000 Insurance proceeds received R400 000 Other relevant information: Reboni had an assessed capital loss of R83 000 from the previous year of assessment and the section 11(o) scrapping allowance has been elected. REQUIRED: MARKS 1. Calculate the recoupment on the sale of the factory. 2. Calculate the adjusted proceeds on the sale of the factory. 3. Calculate the base cost on the sale of the factory. 4. Calculate the capital gain/loss on the sale of the factory. 5. Calculate the scrapping allowance of Machine HOS1. 6. Calculate the base cost of Machine HOS1. 7. Calculate the capital gain/loss of Machine HOS1. 8. Calculate the taxable capital gain/loss of Reboni (Pty) Ltd for the 2021 year of assessment. 6 2 5 1 4 3 1 3 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 8 TAX2601 Oct / Nov 2021 [TURN OVER] QUESTION 4 (25 marks, 30 minutes) You are the newly appointed accountant at Spice Factory (Pty) Ltd, a company selling herbs and spices online and making deliveries to its customers across South Africa. The company also has a large storage facility and shop in Durban, KwaZulu Natal from where local customers could buy the spices. The company’s current year of assessment is 28 February 2021 and it is not a small business corporation as defined in the Income Tax Act. PART A (10 marks, 12 minutes) As part of your duties, you are responsible for calculating the provisional tax payments. On 20 February 2021, you discover that the first provisional tax payment for the 2021 year was not calculated nor paid to SARS. You quickly manage to gather the following relevant information: Information gathered on 20 February 2021: Year of assessment Taxable income Date assessment was received 2020 R7 450 680 not yet assessed 2019 R5 469 120 not yet assessed 2018 R4 677 000 (assessed) 12 March 2019 On 28 February you gather the following information to calculate the second provisional tax payment for the current year: Information gathered on 28 February 2021: Year of assessment Taxable income Date assessment was received 2021 R6 156 000 (estimated taxable income - seriously calculated) - 2020 R7 450 680 not yet assessed 2019 R5 469 120 (assessed) 24 February 2021 REQUIRED: MARKS Calculate the first and second provisional tax payments of Spice Factory (Pty) Ltd for the year of assessment ending 28 February 2021 and specify by which date the first and the second provisional tax payment should be made. Ignore any penalties and interest. Provide brief reasons why you used the chosen basic amount for the first and second provisional tax payment calculations. 10 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 9 TAX2601 Oct / Nov 2021 [TURN OVER] QUESTION 4 (continued) PART B (15 marks, 18 minutes) During the finalisation of the accounting records for the current year of assessment, the chief financial officer of Spice Factory (Pty) Ltd asks you to explain whether the proceeds arising from the following transaction will be included in gross income. Information gathered on the matter: • The company decided to sell herbs and spices online only and therefore no longer needed a large premises. They decided to put the building they operated from up for sale. • A sale agreement was signed on 2 May 2020 and the building was sold for R1 800 000 cash, which was a very good offer as it was higher than the market value of R1 200 000 at the time. • The building was purchased in 2005 by a means of loan (with a market related interest rate) and was purchased to operate from i.e. to sell herbs and spices to the public and for storage. No allowances for tax purposes were ever claimed on the building. REQUIRED: MARKS List all the requirements and discuss whether the proceeds of R1 800 000 received from the sale of the building will constitute gross income for Spice Factory (Pty) Ltd, as defined in the Income Tax Act, for the year of assessment ending 28 February 2021. (Hint: Besides applying the facts of the transaction to the other requirements of the gross income definition, you must discuss the capital (or revenue) nature of the transaction at length.) You can ignore case law in your discussion. 15 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace i TAX2601 Oct / Nov 2021 ANNEXURE A: ADDITIONAL INFORMATION The income tax rates applicable to small business corporations are as follows: • 0% on taxable income not exceeding R83 100 • 7% on taxable income exceeding R83 100, but not exceeding R365 000 • R19 733 plus 21% on taxable income exceeding R365 000, but not exceeding R550 000 • R58 583 plus 28% on taxable income exceeding R550 000 The income tax rates applicable to micro businesses: Turnover Rates of tax R0 – R335 000 R335 001 – R500 000 R500 001 – R750 000 R750 001 – R1 000 000 Nil 1% of the amount over R335 000 R1 650 + 2% of the amount over R500 000 R6 650 + 3% of the amount over R750 000 ANNEXURE B: INCOME TAX MONETARY THRESHOLDS SUBJECT TO PERIODIC LEGISLATIVE CHANGE (extract) Description Reference to Income Tax Act, 1962 Monetary amount Small-scale intellectual property: Intellectual property with a cost below the amount indicated is immediately deductible Paragraph (aa) of the proviso to section 11(gC) R5 000 Prepaid expenses: Limit of prepaid expenses that will not be deferred until delivery of goods, services or benefits Paragraph (bb) of the proviso to section 23H(1) R100 000 Small business corporations: Corporations qualify for tax incentives if gross income does not exceed the amount referred to Section 12E(4)(a)(i) R20 million © UNISA 2021 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 2 Question 1 1 .Income tax liability of GoSolar (Pty) Ltd for the year of assessment ending 31 March 2021. R Income Sales (R - R2 000 000) Lease premium & rental • lease premium 110 000 (lease premium is calculated once off) • Monthly rental of (R20 000 x 2 ) 40 000 Expenses • Factory building (R 4000 000x 5%) ( 200 000) • New floor block Land R350 000 no allowance Nil Contruction (R 1 400 000 x 5%) (70 000) • Manufacturing machine: AAA 680 000 New sec (12C) R1 700 000 x 40% • Manufacturing machine: BBB (180 000) Second hand sec 12C R900 000 brought into use 2019 R900 000 x 20% yr 2020 =R 180 000 R900 000 x 20% yr 2021= R 180 000 = 540 000 sold for R 200 000 = 540 000 – 200 000 (340 000) • Doubtful debts & prior year allowance Delivery vehicle 1 380 000,completely Nil Written off after 4 years as per notes Heavy duty truck 1 R 800 000 (written off) Nil This study source was downloaded by from CourseH on :09:04 GMT -06:00 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 3 Dividend declared R 350 000 Nil (dividend is exempt) Doubtful debts for: 2021 R278 000 X 25% 69 500 Provisional tax payment R2 679 000 Nil Salaries ( 6 300 000) Pension fund Contributions (700 000) Rented office equipment ( 800 000) Taxable Income Tax liability for companies is 3332 700 x 28% therefore x 28% 2. Calculating the amount that the shareholders of GoSolar will receive (combined) in respect of the dividend declared: Divident declared R 350 000 Taxed at 20% (350 000 x 20% = R 70 000 Therefore = R 350 000 – R70 000 = R280 000 This study source was downloaded by from CourseH on :09:04 GMT -06:00 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 4 Question 2 The income tax liability of Shisanyama Catering Equipment Supplies (Pty) Ltd for the year of assessment ending 31 March 2021 R Taxable income(given) 7 890 000 Bad debt Debtors (28 000 – 8 000) (20 000) Loan Nil Capital allowances on assets and related costs Factory R1 200 000 X 5% = 60 000 (60 000) Machine Metal – new R870 000 X 100% (870 000) (870 000) Machine Plastic – second hand R560 000 X 100% (560 000) Recoupment - Sold for 400 000-() (400 000) Computer system - new (R600 000 + 12 500 )X30% ( 183 750) Office equipment - all new R940 000 Nil Repairs to factory building – The outside of the building was repainted ( 42 000) An awning (outside covering) R15 000 not part of revenue Nil Insurance A prepaid insurance R500 000 x 7/12 = R 291 667 (291 667) Repayment 500 000 x 5/12= R 208 333 ( 208 333) Inventory Opening stock (643 000) Purchases of inventory materials (542 000) This study source was downloaded by from CourseH on :09:04 GMT -06:00 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 5 Closing stock (378 000) Catering equipment with a market value of R was sold to a retirement home Taxable income before donation 3 678 250 Donation Actual is R 50 000 limited to 10% = 3 678 250 x 10% = 367 825 Limited to R 50 000 = 367 825 – 50 000 = 317 825 This study source was downloaded by from CourseH on :09:04 GMT -06:00 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 6 Question 3 Reboni (Pty) Ltd (Reboni) year of assessment ends on 28 February 2021 and it is not a small business corporation as defined in the Income Tax Act The recoupment on the sale of the factory. = Proceeds – Tax Value Tax value = cost -Capital allowance claimed • Factory Building = = R 2035 000 Improvements = = R 405 000 Therefore: Tax value = 2035 000 + 405 000 = R 2440 000 Recoupment = = R 1860 000 Limited to capital allowance that was claimed = 1665 000 + 45 000 = R1710 000 2. The adjusted proceeds on the sale of the factory. 000 = R 2590 000 This study source was downloaded by from CourseH on :09:04 GMT -06:00 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 7 3. The base cost on the sale of the factory. R Factory cost 3 700 000 Improvements cost 450 000 Factory capital allowance (1665 000) Capital allowance (45 000) Valuation fees 15 000 Repairs (are revenue,excluded) nil Legal fees 26 000 R 2481 000 4. The capital gain/loss on the sale of the factory. = Adjusted proceeds – Base cost = 2 590 000 – 2 481 000 = R109 000 5. The scrapping allowance of Machine HOS1. Proceeds – Tax value 400 000-() = (R160 000) 6. The base cost of Machine HOS1. Cost 700 000 Capital allowance claimed (140 000) R 560 000 7. The capital gain/loss of Machine HOS1. = = R160 000 loss This study source was downloaded by from CourseH on :09:04 GMT -06:00 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 8 8. The taxable capital gain/loss of Reboni R Factory Gain 109 000 Machine loss (160 000) Total capital loss ( 51 000) Assessed capital loss (83 000) Capital loss R 134 000 This study source was downloaded by from CourseH on :09:04 GMT -06:00 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 9 Question 4 This study source was downloaded by from CourseH on :09:04 GMT -06:00 Powered by TCPDF () S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace [TURN OVER] UNIVERSITY EXAMINATIONS Oct/Nov 2020 TAX2601 Principles of Taxation 100 Marks Duration 3 Hours (including 60 minutes for upload) This paper consists of nine (9) pages plus the annexure (p i). IMPORTANT INSTRUCTIONS: 1. All amounts exclude VAT unless stated otherwise. 2. All persons mentioned are residents of the Republic of South Africa unless stated otherwise. 3. SARS = South African Revenue Service The answering of this paper: 1. This paper consists of four (4) questions. 2. Answer all the questions. 3. Start each question on a new (separate) page. 4. Write your student number on the top of each page. 5. Show all workings, where applicable. Where an amount is subject to a limitation, clearly indicate the application of the limitation. Where any item is exempt from tax or not allowable as a deduction, this must be indicated, and a brief reason provided. All amounts must be rounded to the nearest Rand. 6. Proposed timetable (try as far as possible not to deviate from this timetable): Question Topic Marks Minutes 1 Income tax liability of a company 25 30 2 Income tax liability of a small business corporation 25 30 3 Capital gains tax 25 30 4 Provisional tax payments and general deduction formula 25 30 - Additional time for upload of your answer file in pdf - 60 TOTAL 100 180 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 2 TAX2601 Oct / Nov 2020 [TURN OVER] Honesty Declaration: By submitting my exam solution, I declare that: • I know what plagiarism is, that plagiarism is wrong and that disciplinary steps can be taken against me if I am found guilty of plagiarism; • This exam solution, submitted by myself, is my own work; • I have not assisted any other student in any manner, and I have not had the assistance of any other person, in completing this exam; • I know that if I am found to be in violation of this declaration, I will receive 0% for this examination. Please note: You do not have to sign the declaration. By clicking the honour pledge when submitting your answer file, you automatically declare that you adhere to all the above with regards to this specific examination. Submission instructions: The exam paper will remain available throughout the examination session. Commence the submission (uploading) of your answers (one pdf file with all the pages included) as soon as you have completed the assessment, do not wait for the session to conclude. Suggestion: Start uploading your answer file at 10:30 (2 hours after the start of the exam session) at the latest, to allow enough time for any delays in the process. You have to submit your answers in ONE PDF FILE – ensure ALL your pages are in one file. The file name of your pdf document must be in the following format: Student number, space, TAX2601. For example: TAX2601. Submission method 1: • Go back to the link where you downloaded your examination paper from the landing page of myUnisa. • Click on the link “Submit answer file”. • Follow the instructions on the screen. or Submission method 2: • Go to myUnisa. • Log in with your student number and password. • Select the module in the “assessment info” tab. • Follow the instructions on the screen. S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 3 TAX2601 Oct / Nov 2020 [TURN OVER] QUESTION 1 (25 marks, 30 minutes) Solcon (Pty) Ltd manufactures glass containers. It is not a small business corporation as defined in the Income Tax Act and its operations meet the requirements of a manufacturing process. The following information is available for calculating the company's taxable income for the year of assessment ended 31 March 2020. 1. Taxable income amounts to R3 300 000, before taking the information below into account. 2. Solcon (Pty) Ltd paid pension fund contributions of R50 000 during the year on behalf of an employee. 3. The company paid an annuity of R25 000 to the wife (a dependent) of a deceased employee (the employee died during the year of assessment). 4. A restraint of trade compensation of R900 000 was paid to the financial manager, who resigned, on 1 February 2020. The restraint is effective for two years and the full amount was included in the financial manager’s income in his 2020 income tax return. 5. A trademark licence was renewed on 1 January 2020 for R7 000. A new trademark was also purchased on 1 February 2020 for R35 000. 6. Solcon (Pty) Ltd donated trading stock during the year, which was acquired in the previous year of assessment at a cost of R15 500, to a local farmer’s market. The donation does not qualify for the section 18A deduction. The market value of the trading stock on the date it was donated was R19 000. 7. The cost price of fixed assets that Solcon (Pty) Ltd used during the tax year consists of the following: R - Manufacturing machine Z purchased new on 1 May 2019…………………………… .. 650 000 - Truck purchased second-hand on 1 December 2019 ................................................ 600 000 - Security alarm system purchased on 1 March 2019 ................................................. 60 000 - Manufacturing building purchased on 1 January 2015 ............................................ 4 500 000 - Newly erected commercial building situated within an urban development zone brought into use on 1 August 2019. All the requirements for an urban development zone allowance has been met. ......................................................... 2 100 000 - Manufacturing machine A purchased second-hand on 1 April 2019. This machine was sold on 31 January 2020 for R100 000.…. ....................................................... 200 000 Binding General Ruling no.7 makes provision for the following write-off periods for assets: - Trucks 4 years - Security alarm system 6 years Solcon (Pty) Ltd has elected to apply the section 11(o) scrapping allowance, where applicable. 8. The annual insurance premium of R220 000 for the period from 1 January 2020 to 31 December 2020 was paid on 2 January 2020 to an insurance company. S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 4 TAX2601 Oct / Nov 2020 [TURN OVER] QUESTION 1 (continued) 9. The chief executive officer’s wife, Dolly, was in a motor car accident on 1 October 2019. She was not hurt, but her vehicle was badly damaged and had to be repaired by a panel beater, which took two weeks to finish. During this time, Solcon (Pty) Ltd paid R8 000 to a rental company to provide Dolly with a vehicle for her own use. 10. Solcon (Pty) Ltd decided to lease a commercial building to sell some of their own manufactured stock and concluded a lease agreement with Buildings (Pty) Ltd. According to the agreement Solcon (Pty) Ltd had to pay a monthly rental amounting to R15 000 from 1 August 2019. 11. Solcon (Pty) Ltd made a donation of R300 000 to “Every Child Hospice” (a public benefit organisation) on 2 February 2020 and received a section 18A receipt. REQUIRED: MARKS Calculate the normal income tax liability of Solcon (Pty) Ltd for the year of assessment ended 31 March 2020. You must provide a reason if you consider any amount not deductible or not taxable for income tax purposes. 25 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 5 TAX2601 Oct / Nov 2020 [TURN OVER] QUESTION 2 (25 marks, 30 minutes) WindowsCo (Pty) Ltd manufactures and sells wooden window frames. The company is a small business corporation as defined in the Income Tax Act and its operations meet the requirements of a manufacturing process. The company’s year of assessment ends on 31 March 2020. You are provided with the following basic income and expenditure summary relating to the 2020 year of assessment: Description Note R Income Sales….………………………………………………………. Rent received………………………………………………… 1 564 750 67 000 Dividends received from a South African company……… 8 000 Expenditure Salaries and wages…………………………………………... Legal expenses………………………………………………. 1 78 000 10 000 Bad debts and list of doubtful debts………………………… 2 10 000 Capital allowances on assets and other related costs……. Inventory – purchases……………………………………….. Advertising ……………………………………………………. Repairs and maintenance…………………………………… Equipment rental……………………………………………... 3 4 5 6 7 ? 800 000 20 000 13 000 19 000 Research and development…………………………………. 8 40 000 Notes: 1. Legal expenses • Drawing up the purchase contract of the new commercial office block (see note 3) R 7 000 • Collection of outstanding debtors R 3 000 R10 000 2. Bad debts and list of doubtful debts • Bad debts consist of the following: Trade debtors R 6 000 Loan to an employee R 4 000 Bad debts total R10 000 • The list of doubtful debts for the current year is R55 000. All the outstanding debts have been in arrears for more than 60 days and none of them are older than 120 days. The company does not apply IFRS9. • The doubtful debt allowance claimed for tax purposes in the prior year was R9 000. S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 6 TAX2601 Oct / Nov 2020 [TURN OVER] QUESTION 2 (continued) 3. Capital allowances on assets and other related costs • On 1 October 2019 WindowsCo (Pty) Ltd purchased and brought into use, a new manufacturing machine at a cost of R400 000. • WindowsCo (Pty) Ltd purchased a second-hand delivery vehicle for R120 000 on 1 August 2019 and brought it into use immediately. • New office furniture and equipment was purchased for R80 000 on 1 July 2017 and brought into use immediately. • A contract was concluded on 1 December 2019 to purchase part of a new commercial office block from Corporate Ltd at a cost of R300 000. The office block was brought into use on 1 February 2020. 4. Inventory Raw materials of R800 000 were purchased during the year of assessment. The closing stock as at 31 March 2019 was accounted for at R150 000. The stock-take figures as at 31 March 2020 indicated a cost price of R230 000, which had a market value of R260 000. 5. Advertising • Cost of advertising on a local television station for 1 month • Cost of erecting a billboard close to the highway R 7 500 R12 500 Total costs incurred on 1 December 2019 R20 000 6. Repairs and maintenance The inside walls of the commercial office block were painted on 4 March 2020 at a cost of R13 000. 7. Equipment rental An amount of R19 000 was paid to Anything Equipment (Pty) Ltd to hire equipment that was used for a special design order. 8. Research and Development WindowsCo (Pty) Ltd developed an invention to be used in the business during the 2020 year of assessment. The total operating cost relating to the invention amounted to R40 000 and the requirements of section 11D of the Income Tax Act were met. REQUIRED: MARKS Calculate the normal income tax liability of WindowsCo (Pty) Ltd for the year of assessment ended 31 March 2020. You must provide a reason if you consider any amount not deductible or not taxable for income tax purposes. 25 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 7 TAX2601 Oct / Nov 2020 [TURN OVER] QUESTION 3 (25 marks, 30 minutes) Part A (20 marks, 24 minutes) Pack & Swipe (Pty) Ltd is a large supermarket in Ballito, South Africa. The company is not a small business corporation as defined in the Income Tax Act and its year of assessment ends on 31 March 2020. Pack & Swipe (Pty) Ltd sold the following two assets during the 2020 year of assessment: 1. The company upgraded their cooling system for frozen goods and decided to sell their current mobile refrigeration unit on 30 April 2019 for an amount of R420 000. This mobile refrigeration unit was purchased at a cost of R368 000 on 1 May 2018 and capital allowances of R92 000 were claimed up to the date of sale. 2. An office building was sold on 20 January 2020. The selling price amounted to R2 250 000. The office building was purchased on 10 December 2006 for R1 600 000. Costs incurred in connection with the office building for the period from 10 December 2006 to 20 January 2020 amounted to R1 076 000 and consisted of the following: R Improvements…………………………………………………………………….. 220 000 Transfer duty and transfer costs paid on acquisition…………………………. 236 000 Interest paid on the mortgage bond……………………………………………. 445 000 Rates and taxes………………………………………………………………….. 175 000 1 076 000 Interest paid on the mortgage bond and rates and taxes were allowed as deductions for income tax purposes. No capital allowances were claimed on this asset. Pack & Swipe (Pty) Ltd has an assessed capital loss of R66 000 brought forward from the previous year of assessment. REQUIRED: MARKS 1. Calculate the tax value on the sale of the mobile refrigeration unit. 2. Calculate the recoupment on the sale of the mobile refrigeration unit. 3. Calculate the adjusted proceeds on the sale of the mobile refrigeration unit. 4. Calculate the base cost on the sale of the mobile refrigeration unit. 5. Calculate the capital gain/loss on the sale of the mobile refrigeration unit. 6. Calculate the base cost on the sale of the office building. 7. Calculate the capital gain/loss on the sale of the office building. 8. Calculate the taxable capital gain/loss of Pack & Swipe (Pty) Ltd for the year of assessment ended 31 March 2020. 2 3 2 2 1 5 2 3 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 8 TAX2601 Oct / Nov 2020 [TURN OVER] QUESTION 3 (continued) Part B (5 marks, 6 minutes) You have been approached by a client to answer the following unrelated queries with regards to Capital Gains Tax (CGT): Query 1 Which one of the following is not an asset for capital gains tax purposes? (a) Gold coins (b) Goodwill (c) Trading stock (d) Shares (e) Manufacturing building Query 2 Which one of the following is not a disposal for capital gains tax purposes? (a) The donation of an asset. (b) The improvement to an asset. (c) The scrapping, loss or destruction of an asset. (d) The creation, variation, transfer, or extinction of an asset. (e) Any alienation or transfer of ownership of an asset. Query 3 Which of the following statements with regards to CGT is false? (a) A taxpayer can off-set an assessed capital loss against a capital gain. (b) A taxpayer can off-set an assessed capital loss against taxable income. (c) The inclusion rate for a company is 80%. (d) The proceeds of an asset should be reduced by the amount that must be included in the gross income of a taxpayer. (e) All of the above. Query 4 Which one of the following statements is correct? (a) A business entity must exclude an amount of R40 000 from the tax value of an asset. (b) A business entity must deduct an annual exclusion of R40 000 from the net capital gain/ loss. (c) A business entity must deduct an annual exclusion of R40 000 from the aggregate capital gain/loss. (d) A business entity may not use the annual exclusion. (e) A business entity may use any amount to lower its taxable capital gain. Query 5 Which one of the following is a disposal for capital gains tax purposes? (a) The transfer of such asset back to the debtor. (b) The issue of any bond. (c) The transfer of an asset as security for a debt. (d) The distribution of an asset by a company to a shareholder. (e) The disposal by a person where a disposal is made to correct an error in the registration of immovable property in the deeds registry in that person’s name. REQUIRED: MARKS Answer the five queries by writing down the Query number and your selected answer next to it, for example 1 – a. There is only one correct answer per query. 5 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace 9 TAX2601 Oct / Nov 2020 [TURN OVER] QUESTION 4 (25 marks, 30 minutes) PART A (10 marks, 12 minutes) DrinkUp (Pty) Ltd sells large plastic water containers. The company is not a small business corporation as defined in the Income Tax Act. Its year of assessment ends on 31 March 2020. The following information is presented to you: Year of assessment Date of ITA34C income tax notice of assessment Taxable income 2017 3 May 2017 R2 800 000 2018 20 September 2019 R2 300 000 2019 15 February 2020 R3 200 000 2020 Estimated – not yet assessed R3 600 000 REQUIRED: MARKS i.) Calculate the first provisional tax payment of DrinkUp (Pty) Ltd for the 2020 year of assessment. Round off all amounts to the nearest rand. Clearly state on which date payment should be made to SARS. Provide short reasons why you used the chosen basic amount for this first provisional tax payment calculation. 7 ii.) Calculate the second provisional tax payment of DrinkUp (Pty) Ltd for the 2020 year of assessment. Round off all amounts to the nearest rand. Clearly state on which date payment should be made to SARS. 3 PART B (15 marks, 18 minutes) Merlot (Pty) Ltd manufactures and sells glass wine bottles and its year of assessment ends on 29 February 2020. The employees of Merlot (Pty) Ltd held a strike on 15 October 2019 due to a labour dispute and they intentionally destroyed stock items in the warehouse with an original cost of R750 000 in total. The insurance company paid Merlot R500 000 on 2 November 2019 in respect of this loss. REQUIRED: MARKS List the requirements and discuss whether the expenditure and/or losses above are deductible by Merlot (Pty) Ltd in terms of the general deduction formula (section 11(a) of the Income Tax Act read with section 23) for the year of assessment ending 29 February 2020. Remember to provide a conclusion. You may ignore case law. 15 © UNISA 2020 S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace i TAX2601 Oct / Nov 2020 ANNEXURE A: ADDITIONAL INFORMATION The income tax rates applicable to small business corporations are as follows: • 0% on taxable income not exceeding R79 000 • 7% on taxable income exceeding R79 000, but not exceeding R365 000 • R20 020 plus 21% on taxable income exceeding R365 000, but not exceeding R550 000 • R58 870 plus 28% on taxable income exceeding R550 000 The income tax rates applicable to micro businesses: Turnover Rates of tax R0 – R335 000 R335 001 – R500 000 R500 001 – R750 000 R750 001 – R1 000 000 Nil 1% of the amount over R335 000 R1 650 + 2% of the amount over R500 000 R6 650 + 3% of the amount over R750 000 ANNEXURE B: INCOME TAX MONETARY THRESHOLDS SUBJECT TO PERIODIC LEGISLATIVE CHANGE (extract) Description Reference to Income Tax Act, 1962 Monetary amount Small-scale intellectual property: Intellectual property with a cost below the amount indicated is immediately deductible Paragraph (aa) of the proviso to section 11(gC) R5 000 Prepaid expenses: Limit of prepaid expenses that will not be deferred until delivery of goods, services or benefits Paragraph (bb) of the proviso to section 23H(1) R100 000 Small business corporations: Corporations qualify for tax incentives if gross income does not exceed the amount referred to Section 12E(4)(a)(i) R20 million S - The study-notes marketplace Downloaded by: lungilemasango | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material S - The study-notes marketplace October/November 2020 Examination Module: TAX2601 Module: TAX2601